The Structure of Industry
Entry and Exit Barriers
Rivalry, however, is only one of the forces. Entry Barriers are factors that limit the number of rivals in an industry. Exit Barriers are factors that make it difficult for a firm to leave an industry once it has entered. While textbooks often attempt to list characteristics to identify these barriers, I believe, for the student it is better to just "see" any thing that keeps prospective firms from entering (or exiting) the market as barriers. But, for those who need lists here is a typical (incomplete) list:
| Entry Barriers | Exit Barriers |
| High capital investment | High capital investment |
| High differentiation | Long term contracts |
| Intense rivalry | Government regulations |
| Monopoly rights (patents) | Very specialized assets |
| Access to distribution |
Entry barriers are a problem for those trying to enter a market, but for the firms in the market they are an advantage - they keep competition low and profits up. Potential entrants must pursue actions that creatively circumvent barriers, or take the bold risk and costs of attempting entry despite the barriers. Firms in an industry will attempt to exploit barriers to maintain profits. For example, consumer product manufacturers rely on heavy advertising investments to differentiate their products. And, Timex, at first unable to distribute its inexpensive watches though jewelers, developed the idea of selling watches in department stores.
Exit barriers are problems for those in the market, but may want to consider leaving. American steel manufacturers are not profitable because of the glut of cheap foreign steel. Steel mills are capital intensive, the industry employs large numbers of workers in the mid-eastern states, and steel is militarily a strategic product. National policy cannot allow the market to work because unprofitable steel companies would exit and cease to exist. Most barriers to exit, though, are not this extreme. It is common for entrepreneurs to have a psychological aversion to closing down a business they have invested work, savings, and their life. The behavior of steel mills and of many entrepreneurs is to continue to compete, because the stakes of leaving the market are high. Exit barriers affect risks. The risk is not to be able (or willing) to leave a market that is not profitable.
These barriers typically affect industry profitability and rivalry in ways which can be summarized, as follows:
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